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TMI Blog2023 (12) TMI 1226X X X X Extracts X X X X X X X X Extracts X X X X ..... proach of the assessee to recognize profits/losses in open contracts appears to be prima facie in tune with the accounting practices. The effect of open position if not taken will give rise to totally absurd conclusions. The profit/loss carried already reported for a part of the period in the preceding accounting year will get accounted for again during the year. Similarly, the profits/losses accounted for covering a part of the financial period during the year will again get accounted for in the subsequent year on termination of derivative contracts at the time of maturity. The action of the CIT(A) is apparently flawed and has lead to manifestly absurd results. The action of the CIT(A) cannot be justified in any manner and thus liable to be set aside. The derivative loss claimed by the assessee appears fully justified and requires to be accepted. The plea on behalf of revenue that such loss from open position has no effect on profit and loss is devoid of any merit. We thus set aside the order of the CIT(A) and direct the Assessing Officer to allow the claim towards derivative losses as business losses of the assessee as claimed. Penalty u/s 271(1)(c) on the impugned deriv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld have deleted all the additions made by the assessing officer and should have directed the assessing officer to accept the income as returned by the appellant. 3a. On the facts and circumstances of the case and in law, the Commissioner of Income Tax (Appeal) erred in not deleting the addition of Rs. 7,80,08,374/- made by the Assessing Officer on account of disallowance of loss in derivative trading. b. On the facts and circumstances of the case and in law, the Commissioner of Income Tax (Appeal) erred in making enhancement to be appellant's income by computing alleged profit of Rs. 5,30,39,742/- in derivative transactions instead of loss of Rs. 7,80,08,374/- as returned by the appellant. c. On the facts and circumstances of the case and in law, the Commissioner of Income Tax (Appeal) erred in making enhancement to the appellant's income in respect of derivative transactions. On the facts and circumstances of the case and in law, the action of Commissioner of Income Tax of making enhancement to the appellant's income is illegal, arbitrary without jurisdiction. d. On the facts and circumstances of the case and in law, the Commissioner of Income Ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot pressed in view of the relief granted by the CIT(A). The ld. counsel further submitted that Ground no.3 is the only substantive ground for adjudication purposes. In view of the assertions made, Grounds No.4 and 5 of the grounds of appeal are dismissed as not pressed. 5. Ground No.3 concerns additions of Rs. 7,80,08,374/- made by the Assessing Officer on account of disallowance of loss in derivative transactions on the platform of National Exchange of India (NSE). 6. Briefly stated, the assessee-company is a public limited company engaged in dealing in shares and securities etc. and other financial activities. In the course of scrutiny assessment, the Assessing Officer inter alia observed that the assessee has claimed business loss of Rs. 7,80,08,374/- on account of transactions in derivative segment and consequently reduced the taxable income to this extent. On perusal of documents, the Assessing Officer observed that the derivative losses have been claimed with respect to future segment transactions executed on the platform of NSE. The Assessing Officer alleged that the loss in derivative transactions claimed is not supported by documentary evidences. The Assessing Offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e by the CIT(A) reads as under: Regarding Ground No.4 of the Appeal relating to disallowance of loss on trading of derivatives amounting to Rs. 7,80,08,374, I find that the Ld. AO, in the assessment order, had acknowledged the fact of receipt of copy of account of M/s RB Masters Securities Ltd., Delhi, in which the total debit and credit balances were shown at Rs. 16,06,65,074/- and Rs. 15,89,53,696/-, respectively. Further, the AO also acknowledges that the Appellant had submitted copy of account of M/s Merwanjee Securities Ltd., in which a single transaction of Rs. 1, 12,613/-was booked. I find that the AO had held that these accounts alone do not prove losses in derivatives and hence disallowed the same. The Appellant had submitted that the Ld. AO had never asked about the details in respect of the loss in derivatives during the assessment proceedings and the notice dated 11.7.2011, which was responded to by the Appellant vide letter dated 19.7.11, was also silent about the requirements to produce evidence in support of derivative trading. 6.4.2 The Appellant furnished before me copy of accounts of the aforesaid two brokers and the relevant contract notes in support of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 87.5 5 JP Hydro 22032031.25 21988125 -43906.25 6 LT 1590550 1409590 -180960 7 Parsvanath 224224105.00 231591115 7367010 8 Powergrid 26395022.5 26637476.25 242453.75 9 Reliance 16561117.5 21203287.5 4642170 10 Unitech 5217570 5089725 -127845 Total 80,12,49,537.8 85,42,89,279.3 5,30,39,741.5 Keeping in view of this, it is evident that during the period, 1.4.2008 to 31. 3.2009, in respect of all settlements recorded in the accounts of the appellant by the NSE, a net gain of Rs. 5,30,39,741.5 on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n considered. The difference (profit/loss) in derivative transaction is arrived at after considering the difference between the sell trade and corresponding buy trade. It was submitted that in view of this, the claim of the appellant with regard the speculative losses in the derivative transactions of Rs. 7,80,08,374 was genuine and may be allowed by me. 6.4.7 I have carefully considered the facts of the case in the light of the submissions made by the appellant and the information requisitioned from NSE u/s. 133(6). On careful consideration of the above, it is observed that as in the F O segment, no delivery of Scrips are effectuated as these transactions are speculative in nature, the net amount of gain or loss, as the case may be, booked on different dates of settlement go towards computation of profits/losses in the derivative transactions during the relevant financial ear. The confirmed account of the appellant by M/ NSE for FY 2008-09 does not show any outstanding position, as claimed by appellant. Therefore, the plea of the appellant is not justified, as speculative transactions are booked on the date of the net settlement, unlike the trading of shares on phy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -658865 Ispat lnd. 1531230 1531230 11873980 11779983 542820 542820 -1112407 JP Associates 3056400 57052800 60109200 301450238 318777525 1140750 5069993 6210743 -36571170 JP Hydro 2193750 2193750 22032031 21988125 1100625 1100625 -1137031 LT 756537 756537 1590550 1409590 0 -937497 Parsvanath 31368120 14951160 46319280 224224105 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8008374 11.1 Adverting to the tabular statement (supra), the ld. counsel pointed out that the assessee was holding open position at the beginning of the FY 2008-09 as on 01.04.2008 for the derivative contracts not matured in the preceding financial year 2007-08. The broker-wise and scrip-wise breakup can be discerned from the tabular statement. Similarly, the contracts which did not mature and close during the Financial Year 2008-09, the respective closing position were carried forward to F.Y. 2009-10. The loss incurred during the year for contract matured and also contract which remained open at the end of the year have been determined on mark to market basis as per the rudimentary accounting principles and practices. Such approach also have the endorsement of judicial dicta. The transaction entered into by the assessee in derivative segment is backed by contract notes of the brokers registered with SEBI. The ld. counsel thus submits that there can be no quarrel on the profit/loss arise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... next year. 11.3 The ld. counsel referred to the broker-wise ledger account and scrip-wise profit/loss in derivative contracts. The ld. counsel thus essentially submitted that the CIT(A) misdirected himself in law in disallowing the derivative loss claimed by the assessee and further enhancing it by imaginary profit of Rs. 5 crore solely based on the data provided by the NSE which were confined to the derivative transactions entered on behalf of the assessee and where the contracts stood matured. The open position was thus not taken into account while determining the correct profit/loss from derivative contracts. 11.4 The ld. counsel further referred to audited financial statement and adverted to note no.14 of the financial statement where the disclosure of open position in the preceding financial year and open position carried forward during the year in future contracts (derivative) has been duly reported. The ld. counsel submitted that by the method of accounting adopted by the assessee consistent with the trade practices, no loss has resulted to the revenue per se . The whole exercise is revenue neutral. The profit/loss arising from a contract for the truncated period f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd in relation to contracts not matured during the year. The ld. counsel submitted that CIT(A) proceeded at fallacious factual premise based on limited data on buy and sale trade only in relation to F.Y. 2008-09 without seeking details of opening and closing outstanding positions. The ld. counsel submits that once the profit/loss arising from opening outstanding position as well as closing outstanding position are given effect, the loss resulted to the assessee in derivative contract matches with the reported loss in the audited financial statement and thus cannot be displaced. The ld. counsel thus submitted that the CIT(A) essentially proceeded on a wholly mistaken presumption of facts and on a totally wrong premise. The correct profit/loss on derivative transaction cannot be determined without giving effect to the profit/loss on unmatured (open) contract carried forward from preceding year and matured during the year and also the profit/loss accrued upto the end of the financial year where the contract obligations has remained open and remained unmatured and carried forward for settlement on the assigned date in the next year. These facts were submitted to the CIT(A) vide letter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or Rs. 85,42,89,279/-. The CIT(A) accordingly inferred that difference of sales and purchases, i.e., Rs. 5,30,39,741/- was the profit earned by the assessee instead of loss of Rs. 7,80,08,374/- as claimed by the assessee. The CIT(A) thus disallowed the loss claimed by the assessee and also made enhancement of taxable income by Rs. 5,30,39,741/-. 14.2 The pith and substance of the case of the assessee is that the CIT(A) while rejecting the derivative losses and indulging in enhancement as acted in an ostensibly erroneous and arbitrary manner. The CIT(A) has failed to appreciate the factual position in correct perspective and made huge addition in a casual manner. The CIT(A) has made reference to the total purchases position and total sale position entered into during the year in a rather simplistic manner without taking note of the factual position made available to him that derivative losses reported by the assessee also include the losses arising from brought forward open position of the earlier year in respect of unconcluded contracts exclude the carried forward open position to next year entered into during the year. The CIT(A) failed to appreciate that the derivative losses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The effect of open position if not taken will give rise to totally absurd conclusions. The profit/loss carried already reported for a part of the period in the preceding accounting year will get accounted for again during the year. Similarly, the profits/losses accounted for covering a part of the financial period during the year will again get accounted for in the subsequent year on termination of derivative contracts at the time of maturity. The action of the CIT(A) is apparently flawed and has lead to manifestly absurd results. The action of the CIT(A) cannot be justified in any manner and thus liable to be set aside. The derivative loss claimed by the assessee appears fully justified and requires to be accepted. The plea on behalf of revenue that such loss from open position has no effect on profit and loss is devoid of any merit. We thus set aside the order of the CIT(A) and direct the Assessing Officer to allow the claim towards derivative losses as business losses of the assessee as claimed. 16. In the result, the appeal of the assessee is allowed. ITA No.5089/Del/2015 Assessment Year 2009-10 17. The captioned appeal relates to imposition of penalty under Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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